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The SECURE Act contains quite a few changes that impact both individuals and business owners.

Two Key Changes For Individuals:

70-1/2 is out.

New Law Raises Age for RMDs from 70½ to 72: Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, if you turn 70½ years old on or after January 1, 2020, you are eligible for the law’s changes and generally must begin taking RMDs by April 1 of the year following the year that you turn age 72.

People who turned 70½ years old in 2019 are not eligible for the law’s changes and generally must begin withdrawing money by April 1, 2020

It’s eliminated for most beneficiaries of Traditional and Roth IRAs whose owners pass away in 2020 or later (Note: previous rules still apply to certain beneficiaries and to all inherited IRAs whose owners passed away before 2020). There are no mandatory annual distributions, but the entire inherited Traditional or Roth IRA balance must be withdrawn by the end of the tenth year.

There are some exclusions as well as other changes – talk with your financial or tax advisor.

Business Owners

There are a number of key changes for business owners, including

Expanded access to annuities within retirement plans in order to help retirees establish their own “pension” plans.

Retirement plan statements will be required to include a lifetime income disclosure at least once during any 12-month period

Multiple-Employer plan rules relaxed – this allows a number of unrelated businesses to set-up a plan with one provider/administrator in an effort to reduce costs – this will help small businesses most.

Of course, there’s more; but, this should give you an idea of why it will pay to work closely with your financial and tax advisors.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER®professional and An Accredited Investment Fiduciary®in his 21st year of private practice as Founding Principal ofThe Independent Financial Group,a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using aproven planning processcoupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Groupdoes not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Maybe the best kept secret in business succession for family-owned businesses.

Jim Lorenzen, CFP®, AIF®

According to the U.S. Census Bureau’s “Statistics of U.S. Businesses”, more than five million firms employ fewer than 20 employees.

Typically, small business owners are the active managers of their businesses, are heavily invested in their businesses, and generally rely on a small number of important accounts and suppliers. Also, in most, if not all, cases no secondary market exists for easy valuation and quick disposition of ownership. Succession often depends on a successful transfer to a key employee or family member while preserving and securing the retirement of the original owner.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER®professional and An Accredited Investment Fiduciary®in his 21st year of private practice as Founding Principal ofThe Independent Financial Group,a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using aproven planning processcoupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Groupdoes not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Few people think about this – and I wish I could be the smart guy that thought of this for this post, but I wasn’t[i]. It’s something called the widow’s penalty tax; it affects the surviving spouse.

After a spouse’s death, the survivor usually goes from a joint return to filing as a single filer, usually resulting in an increase in the survivor’s tax bracket. This happens because often the survivor’s income can be almost as much as they were filing when using a joint return – Bingo! – a large tax bill. One advisor’s client went from a 24% bracket (filing jointly) to a 32% bracket as the survivor[ii]

How to protect yourself?

A series of partial IRA conversions (to Roth IRAs) over several years, keeping the amounts low enough not to change your tax bracket, can help. Do this after age 59-1/2 but before taking Social Security benefits. The distributions will avoid the 10% penalty and, at the same time, take advantage of the low joint rate. By the way, it’s worth mentioning that the current tax law, which has lower brackets than prior law, sunsets in 2026, meaning brackets are set to return to their previous higher rates. Another benefit: the conversions will reduce your taxable income when you are forced to begin your required minimum distributions (RMDs) after age 70-1/2.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER®professional and An Accredited Investment Fiduciary®in his 21st year of private practice as Founding Principal ofThe Independent Financial Group,a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using aproven planning processcoupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Groupdoes not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

According to Financial Planning magazine, more than 5% of school-age children are diagnosed with a disability of some type – seeing, hearing, talking, walking, or thinking; and, planning for their future can not only be complex, but demanding. Indeed, many parents feel overwhelmed!

What makes it so difficult is that the planning isn’t only for the parents – it’s also for after the parents and caregivers are long-gone, which can be another 30 to 50 years! Continue reading →

Politicians don’t live under the same health care or retirement systems the rest of us do – so promises, for them, are easy to make.

Fotila Images

Jim Lorenzen, CFP®, AIF®

I’m not sure how many of the candidates who are running on government supported Medicare for everyone majored in economics or finance – it maybe explains the obvious their all-to-obvious failure to address the question directly.

Sen. Elizabeth Warren, for example, promised that it won’t cost the middle class “one penny” – a feat that hasn’t been accomplished by any country now offering universal health care. According to an inciteful Advisor Perspectives article by Rick Kahler, CFP® and registered investment advisor based in Rapid City, S.D., the middle class in those countries pay income taxes of up to 40% and a national sales tax equivalent to 15-25% of income.

While Senator Warren estimates the cost over a decade at $20 trillion in new federal spending – a cost the middle class is somehow to avoid – Estimates from six independent financial organizations put the figure in the $28-36 trillion range.

A Forbes article describes the tax increases aimed at wealthy individuals. Included are:

Eliminating the favorable tax rate on capital gains

Increasing the “Obamacare” tax from 3.8% to 14.8% on investment income over $250,000

Eliminating the step-up in basis for inheritors

Establishing a financial transaction tax of 0.10%

The capital gains tax increase, the step-up in basis, and the financial transaction tax will all affect middle class investors – potentially anyone with a 401(k) or an IRA. Rick Kahler points out that the American Retirement Association estimates that the financial transaction tax alone will cost the average 401(k) and IRA investor over $1,500 a year.

The 0.10% financial transaction tax, for example, would apply to all securities sold and purchased within a mutual fund or ETF, in addition to any purchases and sales of the funds themselves by investors. Mr. Kahler estimates these costs can run 0.20% to 0.30% a year to fund investors. When you consider some index funds charge only 0.10% in total expenses, the increase comes to 200% or more.

Eliminating the step-up in basis and the favorable capital gains treatment will certainly cost middle class investors more than a penny. A retiree leaving an heir $200,000 with $100,000 in cost basis, could easily cost the middle class inheritor $10,000 to $20,000 or more in taxes.

Candidates can promise – that doesn’t cost anything – but it’s the electorate who needs to do the math. After all, our elected representatives don’t live in the same health care world the rest of us do.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor. Frankly, I’ve always felt they were a little stupid. Continue reading →

For workers in their 40s and 50s facing massive government debt and retirement 15-20 years off, it’s worth asking: Is it time to (Dump) THE 401(K)?

Many Believe It Is…. including some well-known expertsJim Lorenzen, CFP®, AIF®

In his book, The Retirement Miracle, Patrick Kelly writes about a man who had built-up a 401(k) balance of over $2 million over his career. Then, on the brink of retirement, his world was shattered. It was a September day in 2008. He’d lost about 10% of his nest-egg in a single trading day. By October 7th, he found his balance was down to $1.5 million! By the time he reached his last day of work, his account was down to $1.2 million – actually about $1 million less than what it had been before all this happened.

And, just as an aside, if that wasn’t bad enough, that $1.2 million had an embedded tax liability. If this man was in the 30% combined federal and state tax brackets, $360,000 of that belonged to the state and federal government, leaving him with only $840,000 to retire on – and THAT’s only if taxes don’t go up while he’s in retirement.

Is the 401(k) really an answer to America’s growing retirement crisis? After all, 401(k)-type plans are a little less than 40 years old in this country, created when most people were accumulating assets. They haven’t been around long enough to see what happens when the ‘baby-boom bubble’ begins to drain them.

More than a few experts believe it’s time to shake things up, as you’ll see in this video (there’s a very brief ad in front – it’s quick). There’s also another video (scroll down below this one) I think you’ll find very interesting.

A recent article by Wealth Management Systems, writing for the FPA noted the following:

“Recent research indicated that a third of retirement plan participants were “not at all familiar” or “not that familiar” with the investment options offered by their employer’s plan. The study went on to reveal that individuals who were familiar with their retirement plan investments were nearly twice as likely to save 10% or more of their annual income, compared with those who report having little-to-no knowledge about such investments. Understanding your investment options is essential when building a portfolio that matches your risk tolerance and time horizon. Generally speaking, the shorter your time horizon, the more conservative you may want your investments to be, while a longer time horizon may enable you to take on slightly more risk.”

Here’s another one I think you’ll find very interesting.

The 401k Failure

How familiar with their options are 401(k) investors? Not very, apparently. Many now believe it’s time to move from a stock market-based system to something that’s insurance-based. While this may not be the right path for everyone, it certainly appears it is for most, as the following clips from FrontLine, 60-Minutes, and others.

According to The Power of Zero, by David McKnight (with a forward by Ed Slott, a CPA and well-known retirement expert, and a back cover endorsement by David Walker, former Comptroller General of the United States), an insurance-based approach makes far more sense, particularly if properly designed. And, there are a number of advantages.

The insurance-based approach to funding retirement you saw in the video clips, does seem to have it’s benefits.

Indexed Universal Life: A Life Insurance Retirement Plan is one 401k Alternative.• No contribution limits• No Pre-59-1/2 withdrawal penalties AND no mandatory distributions• Tax Free Income at retirement• Zero Loss From Market Crashes – with annual reset locking-in gains!• Tax Free to heirs• Self-funding option in case of disability• Protection from market loss – You never lose money

It also doesn’t create or increase taxation of Social Security benefits, provides protection from lawsuits in many states, has no minimum age or income requirement, avoids probate, and – this is a big one – provides accurate return figures, an issue I’ve discussed in other writings.

Oops. Now what? No more protection? What happened to all those premium payments? How could you have protected yourself?

Jim Lorenzen, CFP®, AIF®

You’ve been paying on an insurance policy for years. Now, you’ve learned your insurance company – the one that top ratings from all the major ratings services – just went bust – what do you do? What could you have done to protect yourself?

There’s no counter for withdrawals and no ATM – and there’s no FDIC insurance. So, how are you protected?

The insurance industry is regulated state-by-state. Each state maintains its independence and operates its own system of regulation, and each is also a member of the National Association of Insurance Commissioners (NAIC), which helps provide uniformity.

It’s important to understand that an insurer may be based in one state, operate in multiple states, and still be domiciled in another. The domicile state is the lead state under normal circumstances for any regulatory actions.

While insurance companies don’t have any guaranties at the federal level, they do have state-backed insurance guaranty associations. According to Gavin Magor, Senior Financial Analyst for Weiss Ratings and oversees their ratings process, the states have established these associations to help pay claims to policyholders of failed insurance companies. However, there are several cautions which you must be aware of with respect to this coverage:

Most of the guaranty associations do not set aside funds in advance. Rather, states require contributions from other insurance companies after an insolvency occurs.

2.There can be an unacceptably long delay before claims are paid.

Each state has different levels and types of coverage, often governed by legislation. They’re unique to that state and can sometimes conflict with coverage of other states. Moreover, most state guaranty funds will not cover title, surety, credit, mortgage guarantee, or ocean marine insurance.

Bottom line: If an insurer fails, it may be awhile for you to get your claim processed and get your money to fix your home or pay bills. But just how often do insurers fail?

Since Weiss started rating insurance companies in 1989, 633 rated insurers failed. As you can see from the graph below, a majority of them were rated “D” or “E” by Weiss at the time of failure.

Image provided by Weiss

The bottom line is that you can still get your claims paid even after your insurer fails, but it might take a while. So, we recommend you check an insurer’s Weiss safety rating before you start doing business with them. With only a 0.02% chance of an insurer rated “A” or “B” failing in any one year, you can see why we favor those over insurers rated “D” or “E”. In addition to our ratings, be sure to learn more about your insurer’s state guaranty funds.

Never heard of Weiss? I believe it. Virtually all insurers love to tout the other better-known companies; however, there’s a problem: Most, virtually all, of those touted rating services get paid by the insurers they rate! Weiss’ revenue is derived from those companies that subscribe to their reporting – it’s a business model similar to Consumer Reports which doesn’t accept advertising. It should be no surprise that fewer companies receive Weiss’ top ratings. It should also be no surprise that there are some ‘top rated’ companies that won’t allow Weiss to come through their doors.

I’ve encountered some insurance agents – I’ve even met some insurer’s representatives – who look at you with a blank stare when you ask about their Weiss rating. Maybe it’s because some big household names didn’t make the cut.

Worth knowing?

Jim

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

So far, tariff-induced inflation simply hasn’t arrived. You’d think if it was going to, it would be here by now. And, the reason is simple: If inflation was in the ‘pipeline’, goods in current inventory would be marked-up in advance in order to raise cash to cover new inventory acquisition costs.

We’ve seen this before. When Mideast oil prices increased, prices at the local gas pumps went up immediately. But, that hasn’t happened with the trade-tariff fears.

Meanwhile, the Fed continues it’s race to the bottom. But, after the most recent cut, the dollar strengthened, making American goods more expensive and reducing demand – opposite the Fed’s intention. Weaker dollars attract foreign capital, increasing exports for American companies; so, the Fed’s losing-streak continues.

Vanguard and Wall Street Journal economists expect inflation to be closer to 2% over the next few years; but, as we know, predictions are one thing, surprises are something else. Inflation has been less than 2% over the past ten years, so it wouldn’t be surprising that the Fed would allow it to run above that number for a period.

For investors, this is where diversification can play a key role. Treasury inflation-protected securities (TIPS) are probably the best and purest form of hedging inflation. Another potential hedge is short-term corporate bonds. This is because if inflation is driven by a strong economy, consumption will increase and profits should be strong; however, it’s important to know what you’re doing: It’s important to understand credit risk – not simply trusting ratings – as well as the average duration of your bond portfolio, as well as how that duration has changed over time.

Of course, bonds can be effective as short-term inflation hedges; but a long-term time frame is another story. Nothing has outperformed stocks and bonds simply haven’t.

Remember, it’s not an either-or proposition. It’s about having a portfolio diversification design that fits your own desires and objectives – and your attitudes about risk. Best to work this out with someone who has seen it all a few hundred times and can help navigate the financial marketplace.

If you don’t know where to find professional help, you can ask your family and friends; you can also consult these resources:

Of course, if you’re not a current IFG client, I hope you will consider checking out the tabs at the top of this page.

Hope this helps,

Jim

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

You’ve seen it – you may have even done it yourself: a 25-year-old who has been out of school for several years is beginning to get (somewhat) established in his/her first possible career position (which may likely be one of many before reaching age 35) and looking to enjoy the newly-found independence and early success.

A new SUV, instead of an older one (because of ‘no-down, zero percent financing’, etc.); a nice apartment in a nice area, instead of something smaller; brand-new expensive furniture instead of starting out with second-hand. In short, living month-to-month convinced they haven’t a dollar to spare – because it’s true.

What if a corner was cut here, another there – enough that allowed a savings of just $92 per week – about $400 per month… money that could be diverted to a retirement or other account?

How much would that 25-year old have saved by age 65?

In case you’re wondering, this is me at age 29 in my first apartment after moving to Southern California. A metal folding chair and a swap-meet fold-out sofa (my bed) were my only furniture.

It depends. Let’s assume that s/he simply puts that money into a low-cost, tax-efficient fund or ETF that tracks an index of large company stocks, something like the S&P index (you can’t buy an index, only a fund that tracks it). Historically, long term returns on such an index has been somewhere around 10 percent. But even if the return were 20% less – 8% – our now 65-year-old would have (rounded-off) $1,396,408. Almost $1.4 million!

But, 25-year-olds seldom do this. They wait until they’re age 40 or 50 before they begin to get serious. Problem is, by then $400 per month savings getting the same return by age 65 will have them ending-up with just $380,410…. More than $1 million less!

To catch up and end-up with the same $1,396,408, our 40-year-old needs to save 266% more each month, $1,468.

One might respond, “Yes, but by then I’ll have more money!” True; but, things will cost more, too. Using a long-term 3.5% inflation rate (not unreasonable), that $1,468 the 40-year-old saves has the same purchasing power as $876 has for the 25-year-0ld.

The moral: Start early and increase your deposits as you age. Don’t wait. The biggest gift you can give your children is not their education. Maybe it’s making sure they aren’t faced with additional responsibilities in your old age.

Jim

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991. Jim is Founding Principal of The Independent Financial Group, a registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.